Assessing the Costs of Adverse Selection by

This article develops and discusses a framework for estimating losses due to adverse selection in insurance. It is shown that expected losses depend only on means, variances and covariances of insurance factors and rates of uptake of insurance. Percentage loadings required to avoid losses are displayed. Application is made to Huntingdon disease where individuals either have the genetic marker or otherwise. Correlated information, such as family history, is also incorporated and it is seen how such information limits losses and decreases required loadings.